Beware the Golden Handcuff
So, you have just joined a new company and you are going to receive a good salary and great benefits. You have also received some sort of “golden handcuff”.
A golden handcuff is some form of remuneration that provides employees a large sum of money, either by a signing bonus or some other method such as the free purchase of shares in the company. The money is considered a loan and then repayable over time either as a forgivable loan or by being reduced through earned bonuses. There are other ways to enact a golden handcuff but these are the most common examples.
If the employee remains with the employer for a number of years, this can be a great initial bonus or share purchase opportunity, so that the original amount is ultimately entirely forgiven or repaid.
However, an employee that receives a golden handcuff should always be mindful about the events that trigger the requirement to immediately repay the loan. Employees should always carefully read the terms of the golden handcuff and be familiar with the events that trigger the immediate repayment. This cannot be stressed enough, since as humans, we have a tendency to assume the very best outcome, and not guard against other outcomes.
The most obvious repayment trigger is the termination of employment. Sometimes this trigger is written that the loan is repayable only on the employee’s termination by the employer “with cause” or on the employee deciding to leave the company. But there are many occasions where repayment of the loan is triggered on termination “for any reason”, ie with or without cause. As such, employees caught in this situation can find themselves suddenly laid off (terminated without cause) and owing a large amount of money under the golden handcuff (with no salary to address this). This is obviously a highly undesirable situation and shows why golden handcuff agreements should be read at the outset. It is a particular concern that in some instances these golden handcuffs are secured by some of the employee’s assets, being shares in the company or otherwise.
Other triggers can include change of residence, change of tax status, bankruptcy or creditor proceedings, and not making annual filings of an operating company.
If one finds oneself in a situation where a golden handcuff loan is being triggered it is important to take the situation seriously. Review all of the supporting documents carefully, and of course always seek legal advice if necessary.
McGuigan Nelson LLP